Most subcontracts contain language, which state that the contractor shall pay the subcontractor within so many days after the contractor’s receipt of payment from the owner. The question then becomes, “what happens if the owner never pays the contractor?” It is a complicated question that has been the subject of much litigation. The general rule is that – provided the owner is not withholding payment due to a failure by the subcontractor – the subcontract will be interpreted as requiring payment within a reasonable time. In other words, even if the owner does not pay the contractor for the subcontractor’s work, the contractor will still be expected to pay the subcontractor despite the fact that the subcontract requires the owner to first pay the contractor.
Of course, as with almost every legal issue, there are exceptions to the general rule. For example, there are “magic words” that will make it more likely that the court will find that the subcontractor has given up its right to payment should the owner not pay the contractor. Examples of such “magic words” are as follows:
• Contractor’s receipt of payment from owner is a “condition precedent” to the subcontractor’s right to payment;